If you own a home and rent it out, the income you earn is taxed under your income tax return as real estate capital income. Unlike other types of income, in this case the law allows you to deduct a wide range of expenses and apply a significant reduction, which makes it worth understanding the calculation well before filing your return.
How the income to declare is calculated
The calculation starts from a simple idea: Net income = Rental income − Deductible expenses. On top of that net income, if the requirements are met, a reduction is also applied before it's added to the taxable base.
The most common deductible expenses
The regulations allow you to deduct a wide list of expenses directly related to the rented property, including:
- Interest on the mortgage secured on the property (not the capital repayment, only the interest).
- Property tax (IBI) and municipal fees (waste collection, etc.).
- Homeowners' association fees.
- Insurance premiums related to the property (home insurance, rent-default insurance).
- Maintenance and repair costs (not improvements or extensions, which are treated differently).
- Depreciation of the property and furniture, calculated according to the percentages set by regulation.
- Management costs, such as a real estate agency's fees for managing the rental.
The reduction for renting out a primary residence
When the property is rented out as the tenant's primary residence (not as business premises, nor as a short-term or seasonal rental), the law provides for a reduction on the positive net income declared. In recent years this has been reformed to depend on certain conditions (such as whether it's a new contract, whether the rental is in an area designated as a stressed housing market, or whether the rent is lowered compared to the previous contract), which has made the applicable reduction percentage vary considerably depending on the specific case.
What happens if the income is negative
If in a given year the deductible expenses exceed the rental income, the net income can be negative. In that case, generally no reduction applies (the reduction only applies to positive net income), and the negative income is declared as such, reducing the general taxable base for that year.
A common mistake: declaring only the income, without the expenses
It's common for owners who start renting out a property to declare only the gross income received, without applying any of the deductible expenses they're entitled to, thereby paying more income tax than they actually owe. Keeping an organized record of all expenses related to the property throughout the year makes it much easier to apply them correctly when it's time to file.
If you're weighing renting versus selling or buying
If you're considering whether it's more worthwhile to rent out a property you own rather than sell it, or if you're thinking about buying a home to put up for rent, our rent vs buy calculator can help you compare the numbers from an investment-return perspective.